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Muted Lending, Low Rates to Hurt SunTrust's (STI) Q3 Earnings

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SunTrust Banks (STI - Free Report) is scheduled to report third-quarter 2019 results on Oct 17, before the opening bell. While its revenues in the to-be-reported quarter are projected to have improved year over year, earnings are likely to have witnessed a decline.

In the last reported quarter, the company’s results were hurt by an increase in expenses and higher provisions, partly offset by rise in revenues.

SunTrust has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 3.6%.

SunTrust Banks, Inc. Price and EPS Surprise

SunTrust Banks, Inc. Price and EPS Surprise

SunTrust Banks, Inc. price-eps-surprise | SunTrust Banks, Inc. Quote

However, the company’s activities in the third quarter were not able to impress analysts. As a result, the Zacks Consensus Estimate for earnings of $1.40 has remained unchanged over the past 30 days. Moreover, the figure indicates a 1.4% decline from the prior-year quarter’s reported number.

The consensus estimate for the company’s revenues of $2.33 billion for the to-be-reported quarter indicates 1.7% rise from the figure reported in the prior-year quarter.

Factors to Influence Q3 Results

Net interest income (NII) to not offer much support: The Zacks Consensus Estimate for SunTrust’s average earning assets for the to-be-reported quarter is pegged at $199.4 billion, which suggests marginal growth from the prior quarter’s reported figure. However, the overall lending scenario was not great during the third quarter. A dismal lending picture — mainly in the areas of commercial and industrial, in which SunTrust has significant exposure — is likely to have hurt its NII.

The company expects NII to remain stable or decline 1% on a sequential basis.
Further, decline in interest rates (two rate cuts in July and September) and flattening of the yield curve along with rising deposit betas are likely to have hurt the company’s net interest margin (NIM).

Management expects NIM in the third quarter to have declined 7-9 basis points (bps) on a sequential basis.

Relatively stable non-interest income: As mortgage rates declined in the third quarter, refinancing activities are likely to have improved. Thus, mortgage servicing fees and production income are expected to have provided some support to SunTrust’s overall mortgage revenues in the quarter.

However, despite decent equity market performance in the third quarter, which seems to have resulted in a slight improvement in equity trading; several lingering concerns, including the uncertainty related to the U.S.-China trade war and Brexit, and expectations of global economic slowdown persisted, resulting in lower client activity. Thus, overall growth in trading revenues is likely to have been muted in the to-be-reported quarter.

Coming to investment banking activities, while dealmakers across the globe were active during the third quarter, M&A deal value and volumes witnessed a decline due to the geopolitical concerns as the companies became more risk-averse. So, this is likely to have hurt the bank’s advisory fees.

Further, despite decent equity market performance and the central bank’s accommodative stance, corporates seem to be shying away from equity issuances, given the global concerns. However, overall debt issuances were decent, given the lower interest rates. Hence, the company is expected to have witnessed only modest growth in overall underwriting fees.

Operating expenses to remain manageable: Due to the branch consolidation initiatives, SunTrust’s expenses have been declining over the past few quarters. This is expected to have continued in the to-be-reported quarter.

Management expects to witness merger-related costs of approximately $10-$15 million in the third quarter.

Asset quality to offer some support: SunTrust expects net charge-off (NCO) ratio in the third quarter to have been in the low end of 25-30 bps.

Further, the consensus estimate for the company’s non-performing assets of $595 million for the to-be-reported quarter suggests a marginal decline from the previous quarter’s reported figure. Also, the estimate for non-performing loans of $533 million indicates a decline of nearly 1% from the previous quarter.

Now, let’s check what our quantitative model predicts.

Chances of SunTrust beating the Zacks Consensus Estimate in the third quarter are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for SunTrust is -0.71%.

Zacks Rank: SunTrust currently carries a Zacks Rank #3. While this increases the predictive power of ESP, we also need a positive ESP to be sure of an earnings beat.

Stocks That Warrant a Look

Here are a few stocks that you may want to consider, as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases.

Sallie Mae (SLM - Free Report) has an Earnings ESP of +24.09% and a Zacks Rank #3 at present. The company is slated to release results on Oct 23.

Federated Investors, Inc (FII - Free Report) is slated to release results on Oct 24. It currently has an Earnings ESP of +0.76% and a Zacks Rank #3.

T. Rowe Price Group, Inc (TROW - Free Report) is also expected to release results on Oct 24. It presently has an Earnings ESP of +0.11% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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